Service-Based Solutions Are the Future of the Machinery and Equipment Sector, Says New Report by Bain

According to the analysis, the changes are being driven by the rapid intensification of competition, the slowdown in hardware-centric innovation, and the great power of digitization to change practically all aspects of business

The global industrial machinery and equipment sector is at a critical moment, facing a series of disruptive forces that will require accelerated changes over the next decade. In its first Global Machines and Equipment Report, Bain & Company analyzes the wave of digital transformation sweeping through the sector.

The report explains how leading companies in these trends are outperforming competitors, with growth in sales and profits, while also fueling an increase in mergers and acquisitions (M&A) activities and private equity (PE) deals. The document also outlines the key moves that machinery and equipment players can make in the next two to three years to address this transformational agenda.

According to Bain’s analysis, the changes reshaping the entire machinery sector are being driven by the rapid intensification of competition, a slowdown in hardware-centric innovation, and the power of digitization to radically change practically all aspects of business. The main transformation is the shift from “beyond the machine” to “machine as a service.” This means combining manufacturers’ hardware with software, automation, and services developed around the machines to deliver fully integrated solutions that are precisely tailored to customer needs — and within drastically altered new business models.

Service-Based Solutions are Growing at an Accelerated Pace

The consulting report shows how this critical shift to a digitally enabled and service-based model of “bundled solutions” is already developing at an accelerated pace. Bain & Company’s research estimates that in the industrial automation sector, where this shift is underway, the share of profits from hardware will drop from 31% today to just 23% by the end of the decade. The remaining profit will come from software, services, and solutions. In some sectors, companies generate over half of their sales and 100% of their profits through services.

By 2030, Bain estimates that leading machinery companies will sell most of their equipment as just a part of bundled solutions that include software and services, further cutting the contribution of hardware to profits. In many cases, companies making this shift have the chance to achieve market growth rates that are often significantly higher than their current businesses.

Among major machinery and equipment companies, Bain & Company found that the average annualized total return for shareholders was 32% from 2019 to 2021, compared to a mere 4% among the sector’s laggards. However, most machinery and equipment companies have been slow to act so far. Research reveals that less than 5% of industrial companies have successfully executed a technology or digital transformation.

Opportunities in ESG

The major transformations in the machinery sector triggered by the forces of digitization and “Industry 4.0” are only part of the story. The reshaping of the industry also presents a tremendous opportunity for its companies to respond to the global push for organizations of all types to meet and master the challenges of sustainability and environmental responsibility: becoming more energy efficient, less wasteful, and customizing operations to enhance the circularity and recyclability of products.

As in other industries, machinery manufacturers are already changing operations and supply chains to reduce greenhouse gas and carbon emissions and pursue the goal of net zero. But for this sector, the implications are deeper. As all sectors are changing, a “Great Reequipment” is underway, as nearly all industrial and manufacturing companies rethink their operations. Machinery businesses that quickly reach potential and develop products and services that enable customers to meet decarbonization goals are likely to gain a first-mover advantage in a massive transition set to last decades rather than years, according to the report.

Supply Chain Shock Waves Drive the Quest for Resilience

The global opportunities to meet sustainability goals, as well as this trend of “Great Reequipment,” are closely linked to the challenge posed by a new era of supply chain vulnerability. Over the past two years, a series of major disruptions in the supply chain have hit the machinery sector, from material shortages and price fluctuations caused by the global pandemic to, more recently, the fallout from the war in Ukraine. These and future unexpected disruptions reinforce and expand the market for machinery manufacturers to equip customers for the future with equipment that ensures more resilient and sustainable supply chains.

Bain & Company’s research shows that supply chain executives across industries have shifted investments to prioritize resilience and flexibility, focusing on cost and speed. Machinery companies are at the forefront of providing the tools and equipment to meet these goals while simultaneously addressing the urgent objective of greater resilience for their own operations. Digital tools are also important and can help organizations manage supply chain risks, improve efficiency, and measure environmental impact and cost in real time.

The Vanguard of China’s Innovative Insurgent Industry Drives Strategic Change

As machinery sector leaders in the next decade move to expand their business ecosystem beyond machinery, other companies will struggle to keep up. Those that cannot ascend the software and automation ladder, focus on tailored solutions for specific “vertical” sectors, and adapt to new business models will be at risk regarding the increasing commoditization of machines sold purely as hardware. Chinese manufacturers are rapidly developing competitive and low-cost hardware.

The competitive challenge is underscored by the reality that China is also at the forefront of the broader trends in the sector examined in the report, with Chinese tech startups and other insurgents presenting a new generation of innovative service offerings. The cloud service Machine Commander, offered by the Chinese startup Zeaho, which provides real-time monitoring of construction sites to improve equipment efficiency, is an example: it has 135,000 pieces of equipment connected to its cloud-based platform just seven years after its founding.

To defend their territory, equipment markets are ramping up investments in digital technologies and accelerating the deployment of advanced services. For example, 100% of original equipment manufacturers (OEMs) surveyed by Bain & Company plan to offer “predictive maintenance” for machinery by 2024. Meanwhile, 95% will provide remote maintenance and new services aimed at operational efficiency.

M&A Reaches Highest Value in a Decade

The wave of changes in the machinery sector is also stimulating an increase in transactions as many companies and their investors reshape business portfolios in light of changing dynamics in the sector. Industrial machinery manufacturers have a growing appetite for large deals as they accelerate these strategies.

The spike in M&A activity means that the average deal size in the sector rose to an average of US$ 179 million in 2020 and US$ 161 million in 2021, breaking the previously observed declining trend until 2017.

For sector executives, M&A provides access to higher-growth and strategically critical markets. These leaders are leaning towards acquiring new capabilities in software, Internet of Things (IoT), artificial intelligence, and connectivity — and at higher valuations, as they move to meet the challenge of the sector’s digitization and transition to service-oriented business models.

Sector Attracts Attention from Private Equity Funds

Just as in mergers and acquisitions, the machinery industry is now among the most active industrial sectors for global private equity trading. Some of the largest industrial PE deals have been in the machinery sector, such as the purchase of Thyssenkrupp Elevators for €17.2 billion (US$ 20.2 billion) by Advent and Cinven in 2020. In the last decade, Bain & Company found that these deals generated returns 10% higher than for industrials as a whole, as evidenced by a median multiple on invested capital (MOIC) of 2.5. During the same period, the enterprise value of machinery companies grew 1.9 times.

PE firms are targeting opportunities to reposition traditional machinery businesses amid the broad trends reshaping the sector. High-performing funds are adopting a holistic approach to value creation, looking well beyond cost structures to explore all areas of potential improvements, including commercial and service excellence, pricing, and M&A potential.

Via Adriana Gartner – RPM Comunicação